Agricultural Exports and The IMF: Separating Myth From Reality

Agricultural Exports and The IMF: Separating Myth From Reality

The
Clinton Administration is pressuring Congress to appropriate an
additional $18 billion in funding for the International Monetary
Fund (IMF). Supporters of this increase believe that the IMF is a
necessary tool to stabilize markets, establish strong and stable
currencies, solve the recent Asian financial crisis, and open
foreign markets to trade. However, not one of these claims is
accurate. Instead, countries in Asia that have not depended on the
IMF for assistance have been less affected by the financial crisis
and are recovering either more quickly or at least as well.

Moreover, the IMF's track record, both in
stabilizing economies and currencies and in promoting trade, is
disappointing. Many IMF policies, such as currency devaluation, are
not likely to stabilize the economies of countries in crisis. And
its lending practices are no substitute for fast-track negotiating
authority and free trade. Historically, instead of helping U.S.
farmers market their products to IMF recipients, the Fund's
recommendations and loans by themselves have been far more likely
to work against U.S. exports.

If
Congress is interested in promoting sound policies that bolster
agricultural exports, it should support fast-track trade
negotiating authority for the President and the efforts of
organizations like the World Trade Organization (WTO). Members of
Congress should oppose further funding of organizations like the
IMF that have failed to demonstrate the ability to promote economic
stability and economic growth.

The IMF's Impact on Agricultural
Exports

MYTH #1: The IMF is a necessary
tool to stabilize markets in financial crisis, and this helps to
maintain market share for U.S. exportsSupporters of the International Monetary Fund believe that
it is uniquely positioned to bring market stability to economies in
crisis. For example, Dean Kleckner, president of the American Farm
Bureau Federation, recently testified before Congress that "U.S.
agriculture's ability to gain and maintain market share is based on
many factors, including...the ability to utilize market stabilizing
tools such as a properly functioning IMF."1

Reality: The IMF is more likely to
undermine the market than to bring it stabilityThe very possibility of receiving an IMF rescue package
creates what economists call a "moral hazard." Bailouts shield
investors and politicians from the consequences of poor decisions
by "socializing" risks--spreading them across a bigger constituency
and thus reducing the costs associated with each failed investment.
Many people end up paying for an investor's errors. The costs of
failure for the investor are reduced and, either directly or
indirectly, the IMF compensates investors when their plans fail.
IMF bailouts encourage speculation of the sort that investors
probably would avoid if the IMF were not around to shield them from
failure. Bailouts also signal governments that they will not have
to bear the costs of failing to reform their economies; instead,
the IMF will pay the price of their inaction. Thus, IMF activities
neither prevent nor cure financial crises. They only encourage
them.2

The Administration has portrayed IMF
funding as a way to avoid or mitigate the consequences of the Asian
crisis for U.S. agricultural exports. According to August
Schumacher, Jr., Under Secretary for Farm and Agricultural Services
at the U.S. Department of Agriculture, "The recovery of U.S.
agricultural exports will depend on the success of IMF-led
efforts."3 However, an IMF bailout
is more likely to work against increasing U.S. agricultural exports
to Asia, and it may even aid the industry's foreign competitors.
For example, Indonesia, South Korea, and Thailand are the sources
of about 8.5 percent of the agricultural, fish, and forestry
products imported by the United States in FY 1997. Indonesia and
Thailand, in fact, imported only $1.4 billion of U.S. agricultural,
fish, and forestry products, but they exported $4.5 billion of
these products to the United States in 1997, giving these two
countries a $3.1 billion trade surplus with the United States on
agricultural, fish, and forestry products.4 This
trade surplus is likely to worsen in the wake of the Asian
financial crisis, regardless of IMF assistance. While trade
deficits by themselves are neither good nor bad, they do serve as a
barometer of trade relations. IMF assistance will further worsen
the U.S. trade deficit by aiding foreign competitors of the U.S.
agricultural industry.

MYTH #2: IMF financial assistance
is vital for countries trying to establish strong, stable
currenciesSupporters of IMF funding argue that unstable foreign
currencies subject to devaluation can be stabilized with IMF
assistance. For example, some 40 agricultural groups and companies
argued in a February 1998 letter to Members of Congress that "We
are concerned that if the IMF does not have sufficient funds to
intervene in any future crisis there will be further devaluation in
Asian currencies."5

Reality: The IMF does not promote
strong, stable currenciesOne of the Fund's most common economic prescriptions is
currency devaluation, which often undermines investor confidence
and can lead to economic crisis. This is precisely what has
happened in Asia. According to Business Week, IMF Managing
Director Michel Camdessus said that he had personally visited
Indonesia, the Philippines, South Korea, and Thailand numerous
times to urge them to devalue their currencies.6 The end result was the
successive devaluation of the region's currencies.7 As a Wall Street
Journal editorial put it, "what began as an IMF program for
`stability' turned into round after round of competitive
devaluation."8

Although some of the countries recovering
from the Asian crisis received IMF assistance, there is no
convincing evidence that IMF assistance is necessary or even likely
to help countries stabilize their currencies. Currency stability is
much more dependent on a government's economic policies. Countries
with sound economic policies are more resistant to financial
crises, a fact clearly demonstrated by the relatively minor impact
that the Asian crisis had on Hong Kong, Singapore, and Taiwan. Once
a crisis has occurred, countries must act immediately to address
the crisis and implement reform to restore investor confidence.
Korea and Thailand took such steps, albeit with IMF assistance, and
apparently have arrested the crisis. However, IMF assistance is no
guarantee of success, nor is it sufficient or necessary to restore
investor confidence. For example:

Indonesia has received IMF assistance,
yet it remains in crisis because of its resistance to the sort of
reform that would restore investor confidence. Its first two
agreements with the IMF (it is now on its third in eight months)
failed to rally investor confidence either in Indonesia or in the
rupiah.9 Indeed, it was the
failure of the Suharto government to adopt reform and the failure
of private debtors to negotiate with international creditors that
failed to restore confidence despite the IMF's assistance.
According to a Standard & Poor's official, "A resolution of the
[private] debt problem and Suharto's rededication to other economic
reforms are the only things that can save Indonesia."10 Worse, the IMF actually
works against currency stability. When Indonesia indicated
that it was willing to take independent action to stabilize its
economy by announcing its intention to establish a currency board,
the value of the Indonesian rupiah climbed about 30
percent against the dollar. However, when the IMF forced Indonesia
to abandon this plan, the value of the rupiah
collapsed.11

At the same time, Malaysia has restored
relative stability to its currency and restored investor confidence
without IMF assistance. For example, National Power of Great
Britain recently announced a $125 million investment in the
Malaysian power company Malakoff; DHL Worldwide Express plans to
invest nearly $27 million to expand its operations in Malaysia;
Ericsson, a Swedish telecommunications company, announced that it
will invest about $11 million to set up a regional communications
hub in Malaysia; and U.S. insurer American International Group
announced a $10 million joint venture software company that will
work closely with Malaysia's Multimedia.12

The IMF policy of devaluation is likely to
hurt U.S. agricultural exports because rapid reductions in a
country's currency values, all else being equal, result in more
exports for that country and fewer imports. For example, when a
country's currency loses 25 percent of its value, its exports
become about 25 percent cheaper, and imports from all other
countries are about 25 percent more expensive. The result: The
country whose currency was devalued will export more and import
less. In real terms, IMF policies have made U.S. exports to
Indonesia, Thailand, and South Korea more expensive than they were
before the Fund's involvement. According to the U.S. Department of
Agriculture, the value of U.S. agricultural exports is projected to
be 2 percent less than in 1997--even assuming a relatively quick
recovery in Asia.13

MYTH #3: The recovery of Asia
depends on IMF assistanceAdvocates of increased IMF funding often argue that
President Clinton's $18 billion request for IMF funding is needed
to help Asian economies recover, to prevent the spread of the
financial crisis, and to prevent the recurrence of a similar crisis
in other parts of the globe. For example, an Iowa Farm Bureau press
release states that "the United States must take immediate action
to stabilize the Asian financial crisis by providing additional
funding to the International Monetary Fund (IMF)."14 The American Farm
Bureau Federation stated that "IMF-led assistance programs are
critical to the overall recovery in the region [Asia]."15

Reality: Countries with little or
no reliance on IMF loans have been less affected by the recent
financial crisis in Asia or are recovering at least as well as
countries that received an IMF bailoutAlthough Hong Kong, Singapore, and Taiwan were affected by
the Asian crisis, they have no dealings with the IMF and appear to
be weathering the problems in Asia better than their IMF-assisted
neighbors.16 In fact, it is because
these countries have pursued wise economic policies that they were
largely unaffected by the financial crisis. Taiwan, for example,
remains independent of the IMF and continues to grow. A recent
Heritage analysis observed that, "as stock markets plummeted during
1997 in Thailand, Indonesia, and Korea by 55, 52, and 42 percent,
respectively, the stock market in Taiwan grew by 18
percent."17 In addition, the prime
lending rate (the price of capital and a direct indication of risk)
in Hong Kong, Singapore, and Taiwan remains lower than in other
Asian nations: 10 percent, 7.5 percent, and 7.65 percent,
respectively.18

Malaysia, Indonesia, South Korea, and
Thailand were hit particularly hard by the Asian crisis. Malaysia
weathered the financial storm as well as South Korea and Thailand
and better than Indonesia, despite being the only one of these
countries to refuse IMF loans.19
The Malaysian ringgit has remained steadier and stronger
in value in relation to the U.S. dollar than the Indonesian
rupiah, the South Korean won, and the Thai
baht, and Malaysia maintains its prime lending rate of 12
percent, compared to 36 percent, 11.5 percent, and 14.75 percent,
respectively, in Indonesia, South Korea, and Thailand.20 The evidence indicates
that pursuit of the sound economic policies--not IMF assistance--is
the key to withstanding financial crisis and maintaining economic
growth.21

MYTH #4: The IMF is a good tool to
open foreign markets, particularly since the President's request
for fast-track authority has not been grantedSupporters of the IMF often argue that since Congress
failed to provide President Clinton with fast-track trade
negotiating authority, the IMF is uniquely positioned to help
liberalize and open foreign markets to U.S. exports. According to
the Iowa Farm Bureau, for example, "A U.S. contribution to the IMF
of $18 billion will not only help rebuild foreign economies, but
keep U.S. farmers at the trade table as the absence of fast track
legislation continues."22

Reality: Neither the IMF nor an
$18 billion funding increase is an effective substitute for
fast-track authority and free tradeThe agricultural industry in general understands the
importance of trade liberalizing policies, such as fast-track
authority and free trade, and the effectiveness of the World Trade
Organization. The lack of fast-track negotiating authority
threatens the expansion of market share for U.S. agricultural
exports abroad. However, the IMF is not a viable alternative to
traditional trade liberalizing vehicles.

According to Under Secretary Schumacher,
"U.S. farm and food products can face tariffs of 100, 200, and 300
percent or more in some markets. Our own import duties average less
than 5 percent, while bound agricultural tariffs worldwide average
around 56 percent.... [W]e need to get these high bound tariffs
down further."23 The agricultural
industry is understandably concerned that the lack of fast-track
authority will prevent any progress in reducing these barriers to
U.S. agricultural exports and impede trade liberalization
globally.

However, supporting free trade is not the
IMF's primary goal, and recipients of IMF aid typically are the
most egregious abusers of trade barriers. According to research
conducted at The Heritage Foundation, the average tariff rate for
IMF loan recipients is more than 17 percent--over five times higher
than the average tariff rate of the countries in the European Union
and Japan. For example:

Thailand, South Korea, and Indonesia
received over $35 billion from the IMF in the recent Asian bailout,
yet they collectively maintain an average tariff rate of 11
percent--over five times higher than Japan's and nearly four times
greater than tariff rates of members of the European Union.

Bangladesh has received five loans
totaling $1.125 billion from the IMF since 1983, yet it has
maintained an average tariff rate of around 50 percent for most of
this period.

India received two loans totaling $2.86
billion from the IMF in 1991 and 1992, yet it has maintained an
average tariff rate of over 30 percent for most of this period.

Pakistan has received five loans
totaling over $3 billion from the IMF since 1989, yet it has
maintained an average tariff rate of around 47 percent for most of
this period.

By comparison, the 15 countries of the
European Union maintain an average tariff rate of 3.6 percent;
Japan has an average tariff rate of less than 2 percent; and Hong
Kong has an average tariff rate of 0.1 percent.24 Portugal is the only
one of these 17 countries to receive an IMF loan in the past 15
years; its 1984 loan was for about $600 million.

Non-tariff barriers to trade among IMF
recipients are extremely high and also work to keep U.S. exports
out of these countries. Based on data compiled and analyzed for The
Heritage Foundation/Wall Street Journal 1998 Index of Economic
Freedom, most non-tariff barriers among IMF recipients include
(but are not limited to) import bans and quotas, corrupt customs
officials, unnecessary licensing and labeling requirements, and
unrealistic health and sanitary requirements aimed specifically at
keeping out U.S. exports, including agricultural products. The
Index analysis also indicates that these non-tariff
barriers are more prevalent among IMF recipients than
non-recipients.25

The IMF was created in 1944 by the Bretton
Woods Agreement, along with the World Bank and the General
Agreement on Tariffs and Trade (GATT), which is now the World Trade
Organization. GATT, not the IMF, was created to promote free trade.
Consequently, the IMF has been ill-equipped to deal with trade
liberalization issues. Historically, even when the IMF has
attempted to promote trade liberalization, its efforts have been
largely ineffectual. This makes its assistance more likely to
reward countries that have high barriers to trade with loans than
to encourage them to lower their barriers to levels maintained by
the United States, Europe, or Japan.

Conclusion

Some
supporters of additional funding for the IMF base their position on
the belief that the IMF, through its policies and assistance, can
preserve and promote U.S. agricultural exports to countries in
financial crisis. This is a fallacy: If anything, IMF assistance is
likely to aid foreign agricultural exporters that compete with
American farmers, and to hinder all U.S. exports. Nothing the IMF
has done or can do will restore the lost value of the Asian
currencies. Nor is IMF assistance necessary to prevent currencies
from falling even further. On the contrary, IMF policies and
assistance are more likely to undermine currency strength and
stability. Furthermore, IMF funding cannot offset the resulting
decrease in U.S. exports to these countries. Only the adoption of
sound economic policies by the Asian governments will result in
economic stability, end the Asian financial crisis, and increase
trade with America.

The
best way to increase U.S. exports is to pursue free trade
agreements and push for trade liberalization worldwide. If Congress
truly wants to promote policies that bolster U.S. exports, it
should give the President fast-track trade negotiating authority
and support the efforts of organizations like the World Trade
Organization while opposing ineffective organizations like the
IMF.

Bryan T. Johnson is a former Policy Analyst for
International Economic Affairs at The Heritage Foundation.

Brett
D. Schaefer is Jay Kingham Fellow in International
Regulatory Affairs at The Heritage Foundation.

Endnotes

1.Dean Kleckner,
President of the American Farm Bureau Federation, "The 1998 Outlook
for Agricultural Trade," statement before the Committee on Banking
and Financial Services, U.S. House of Representatives, 105th Cong.,
2nd Sess., February 3, 1998, p. 3.

2.For a detailed
explanation of the destabilizing influence of the IMF on
international markets, see Edwin J. Feulner, Jr., "The IMF Needs Real
Reforms, Not More Money," Heritage Foundation
Backgrounder No. 1175, May 9, 1998; Bryan T. Johnson and
Brett D. Schaefer, "Congress Should Give No
More Funds to the IMF," Heritage Foundation
Backgrounder No. 1157, February 12, 1998; William E.
Simon, George P. Shultz, and Walter B. Wriston, "Who Needs the
IMF?" The Wall Street Journal, February 3, 1998, p. A22;
and Lawrence B. Lindsey, "The Bad News About Bailouts," The New
York Times, January 6, 1998.

3.August Schumacher, Jr.,
Under Secretary for Farm and Foreign Agricultural Services, U.S.
Department of Agriculture, statement before the Subcommittee on
General Farm Commodities, Committee on Agriculture, U.S. House of
Representatives, 105th Cong., 2nd Sess., February 4, 1998.

5.American Association of
Crop Insurers et al., letter to the Honorable Newt
Gingrich, U.S. House of Representatives, February 9, 1998.

6."A Chat with
Camdessus," Business Week, December 29, 1997, p. 58.

7.On June 2, 1997, for
example, before the Asian crisis, the U.S. dollar was worth 893.5
South Korean won; by April 30, 1998, it was worth 1,335.5
won, or about 33 percent less. On June 2, 1997, the U.S.
dollar was worth 24.9 Thai baht; on April 30, 1998, it was
worth 38.605 baht, or 36 percent less. On July 1, 1997,
the U.S. dollar was worth 2,431.5 Indonesian rupiah; by
April 30, 1998, after falling below 17,000 rupiah to the
U.S. dollar in January, the rupiah had stabilized at 8,085
to the U.S. dollar, or about 70 percent below its July 1, 1997,
value.

14.Aaron Putze, "U.S.
Should Not Delay with Contribution to IMF," Accent: Commentary
on Issues and Events, Iowa Farm Bureau, March 14, 1998.

15.Kleckner, "The 1998
Outlook for Agricultural Trade," op. cit.

16.South Korea was
approved for two IMF standby arrangements, one in 1984 worth $786
million and another in 1986 worth $382 million. Thailand also was
approved for two standby arrangements, one in 1983 worth $371
million and one in 1986 for $546 million.

19.This is despite the
many continuing social and political problems in Malaysia, which
include a pervasive system of mandated racial preferences in
government contracts, employment, and access to credit, and a human
rights record criticized by the U.S. Department of State.

20."Bank Rates and
Currency Movements," op. cit.

21.Even if IMF assistance
were necessary to bring about recovery in Asia, the IMF would not
need an additional $18 billion from the United States. The IMF
already has begun to extend loans to Indonesia, South Korea, and
Thailand and has more resources than it needs to meet its
obligations. Indeed, the IMF has more than enough in resources to
conduct two bailouts comparable in size to the recent Asian bailout
of $36 billion. The IMF request for additional funds came long
before the Asian crisis. The fact is that the IMF and the
Administration are not asking for more money to aid in the Asian
bailout; in reality, they seek the additional funding to expand IMF
activities and fund future bailouts. See Feulner, "The IMF Needs
Real Reforms, Not More Money," op. cit.